by Daniel B. Lundy
Amid a visa backlog lasting up to six years or more and uncertainty regarding USCIS policy, EB-5 investors face the risk that after relocating to the United States they could face the loss of their green cards and even potential deportation as a result of changing business fortunes.
This problem is ironically exacerbated by the extraordinary success of the EB-5 program over the last several years. After many years of underutilization, the EB-5 visa category, at least for natives of China, is suddenly oversubscribed as a result of overwhelming investor demand. The approximately 10,000 visa per year cap was hit for the first time at the end of fiscal year 2014, and hit again, with force, early in 2015. The result was a visa availability cutoff date of February 15, 2014 for natives of China.
While a backlog of a mere two years and five months doesn’t seem that bad, industry commentators paint a far bleaker picture. An investor from China who invests and files an I-526 petition today faces a prolonged and unknown waiting period before he or she can obtain conditional permanent residence. Estimates of this waiting period vary, but most in the industry expect that an investor will have to wait four or more years after the approval of his or her I-526 petition before finally obtaining an EB-5 visa. Some even place the wait time at six years or longer.
This is clearly a problem for the EB-5 program because investors who are willing to invest $500,000 or more into the U.S. in exchange for a green card might be less willing to do so if the ultimate goal of their investments—the green card—seems likely to be substantially delayed. Aside from this obvious problem, a number of other issues arise as a result of the visa backlog and the two-part framework of the EB-5 program.
EB-5 is Modeled after Marriage Fraud Amendments
The program is set up as a two-tiered program, modeled after the Marriage Fraud Amendments. The concept of the two-year conditional residence period was borrowed from the Marriage Fraud Amendments, which provide that an alien married to a U.S. citizen for less than two years at the time of acquiring a green card would be granted conditional residence for a period of two years, after which he or she would have to file a petition to remove the conditions with evidence that he or she was still married to the U.S. citizen (or if divorced, the breakup was through no fault of his or her own). However, the Marriage Fraud Amendments also provide that an alien married to a U.S. citizen for more than two years at the time of becoming a permanent resident is granted unconditional permanent residence, and does not have to file a subsequent petition to prove that the marriage still exists (or was terminated through no fault of his or her own). These provisions were intended to deter and detect marriage fraud in immigration petitions based on marriage to a U.S. citizen.
An investor first files an I-526 petition to demonstrate that the requisite funds have been invested and at least 10 jobs for U.S. workers per investor have or will be created within the two-and-a-half-year period following the approval of the I-526 petition. Once approved, the investor gets an EB-5 visa and enters the country (or adjusts status) and becomes a conditional permanent resident. Between 21 and 24 months after becoming a conditional resident, the investor must file an I-829 petition to show that the funds were invested at risk, they remained invested at risk throughout the conditional period, and the jobs were created (or will be created within a reasonable time). Congress apparently wanted to ensure that the U.S. is not giving green cards to investors that simply cash out and fire the U.S. workers they hired two days after getting into the country. Unfortunately, investment and marriage are fundamentally different things, and this regime has some drawbacks as applied to EB-5, and these are exacerbated by the visa backlog.
The Conditional Residence Period
The first thing to understand about the conditional residence period is when it begins and ends. The conditional residence period does not begin to run until the investor either enters the U.S. with an EB-5 visa, or adjusts status from another non-immigrant status to conditional permanent resident status.
It is important to note that whether an investor gets an EB-5 visa or adjusts status in the U.S., the investor (and his or her family members) is being given a visa number. Visa numbers are allocated on the basis of priority date—i.e. the date of filing the I-526 petition. It does not matter that an investor who adjusts status technically never obtains an actual visa; he or she is still allocated a visa number, and that allocation is based on the date the I-526 was filed. You cannot get ahead in the visa line by adjusting status. There is only one line, and it applies equally to all investors, whether adjusting status or consular processing.
The next critical point to know is that the conditional residence period ends when either the I-829 petition is approved, or the conditional resident status is terminated (i.e. the I-829 is denied and all appeals are exhausted). According to the latest data published by USCIS, the average processing time for an I-829 petition is about 17 months. So, in the best case scenario, that two-year conditional residence period is really almost four years. Combined with the fact that the conditional period doesn’t start until the investor gets a visa number and becomes a conditional resident, the investment horizon (i.e. the time from investment until the removal of conditions) is now upwards of six or seven years for investors from China.
At this point, it’s worth reviewing the basic requirements for the I-829 petition, as such a review will help frame the issues. The requirements seem deceptively simple. An investor must demonstrate that he or she:
1) Invested the requisite amount of capital, at-risk, in a New Commercial Enterprise;
2) Maintained the investment, at-risk, throughout the conditional residence period; and
3) The investment has resulted or will result in the creation of at least 10 jobs for U.S. workers.
Number 1) is ordinarily resolved at the I-526 stage, and therefore not really an issue at the I-829 stage. Where things get interesting are in numbers 2 and 3), which will be discussed further below. The most important point to remember is that the investor cannot get his or her investment back until after the conditional residence period is over.
This topic has been written about fairly extensively, so this article will not discuss it in depth. According to the USCIS’ May 30, 2013 Policy Memo, it is no longer an automatic ground for denying an I-829 petition if there has been a material change in the business plan of the New Commercial Enterprise between the time the investor became a conditional resident and the filing of the I-829. While this is a substantial improvement over the prior policy, which resulted in denied I-829s for investors whose businesses had to change to react to business pressures during the conditional period, it is not quite as generous a policy as it seems.
The May 30, 2013 Policy Memo also indicates that if there is a material change between the time the investor files an I-526 and the time he or she becomes a conditional resident, the investor may have to file a new I-526 petition because a material change is grounds for the denial or revocation of an I-526 petition. Obviously, as the visa backlog increases, so does the risk that a business will have to make changes to remain viable before the investor becomes a conditional resident. And the longer the business exists, the more likely it is to need to change due to market pressures. This presents an immigration risk that is created by the combination of the visa backlog and the two-tier structure of the EB-5 program (as currently administered).
Maintaining the Investment ‘At Risk’ This topic has also been the subject of much discussion. Current USCIS policy requires an investor to maintain the investment, at risk, for the entire conditional residence period. The longer that period takes to end, the longer the money must be at risk. This, of course, is a financial risk, but it also presents an immigration risk. An investor faces the prospect of USCIS denying his or her I-829, and losing the green card, if the agency determines that the investor did not meet this continuing at-risk requirement.
Most EB-5 projects sponsored by regional centers (which receive 99 percent of EB-5 investments under the program) use a “loan model,” where investors invest into a new commercial enterprise, and that enterprise loans the money to a job creating enterprise. The problem here is that no borrower wants a loan that is of an indeterminate term. Borrowers want the ability to repay the loan and stop paying interest, or at the very least, to know when the loan is due. As a result, there may be circumstances under which the loan is repaid prior to the end (or possibly even the beginning) of the investor’s conditional residence period. If this happens, then the investor needs to make sure the new commercial enterprise is going to do something to keep the money at risk. Of course, the investor probably wants to know where the money is being invested and wants that investment to be at least as safe as the original investment, so there is an obvious disclosure issue here.
Redeployment is a complicated issue, and USCIS has, unsurprisingly, failed to issue any guidance on what might be suitable as a subsequent investment. Clearly, the money must be at risk, and having money sitting in the bank account of the New Commercial Enterprise or in U.S. Treasury bonds in unlikely to meet this requirement. Redeploying the funds into a new real estate development project, on the other hand, seems likely to be acceptable. However, there are a number of other options that are also likely suitable, and some new solutions currently in development.
Job Creation Complications
Perhaps the most complicated issue resulting from the visa backlog is how it affects the credit an investor will receive for creating jobs. In the regional center context, it is very common for EB-5 projects to rely on construction jobs to satisfy the job creation requirement. Construction jobs are calculated through the use of an economic model, usually an input/output model such as RIMS II or IMPLAN, which allows the number of jobs that will be created to be predicted by using construction expenditures as an input. We put “X” millions of dollars of construction expenditures into the model, and get “Y” number of jobs. According to economic theory, the jobs that are created are deemed to be permanent additions to the economy. Thus, if you spend the money and build the project, the jobs are created permanently, and that is the end of the story. It does not matter when you file the I-829, the jobs are created. Not surprisingly, the vast majority of EB-5 projects are real estate development projects, and this method of modeling job creation is probably one of the reasons for that trend.
Many EB-5 projects rely on jobs that are created as a result of the operation of the project business. Most of these projects also contain a construction component. For example, the development of a hotel has a construction component and an operations component, both of which create jobs and may be used to meet the minimum job creation requirement. There are essentially two ways of calculating operations jobs—counting W-2 employees, and using an economic model. In the regional center context, jobs are almost exclusively calculated with an economic model. The model, however, can use direct W-2 employee hires or revenue as an input, though it is much more common to use revenue as an input. Using revenue or direct employees in an economic model works the same way that it does for construction. For every employee or million dollars of revenue, a certain number of jobs are created. Unlike construction jobs, however, these jobs are not automatically considered to be permanent.
Operations jobs present two potential immigration risks. First, the EB-5 project needs to have a certain amount of success in order to generate those jobs. With construction jobs, it doesn’t matter if the business fails; the jobs are created as a result of spending the money and constructing the building. On the contrary, operations jobs are not created unless an operating business exists. Second, once the jobs have been successfully created, there is an open question about what happens if the business subsequently declines or fails. Current USCIS policy is unclear, and the current thinking is that the jobs should continue to exist at the time of the I-829 filing, and possibly even all the way until I-829 approval.
If the conditional residence period ends up being between seven and ten years, a lot can go wrong before the investor’s I-829 petition is approved. Thus, there is a current perception that operations jobs carry an inherently greater immigration risk than construction jobs, and the longer an investor has to wait to become a conditional resident and start the two-year period, the greater the operational risk becomes.
Fortunately, there is evidence that USCIS may be formulating a policy on this matter that would allow investors to count jobs that have been created, even if they no longer exist at the time of the I-829. On August 10, 2015, USCIS issued a draft policy memo addressing this specific issue, and suggesting that the agency would adopt this interpretation. Unfortunately, it is only a draft memo and cannot be relied upon. This position is, however, supported by the language of the regulations themselves, which specifically require an investor to prove that the jobs “were created and not that they currently exist.”
The visa backlog and uncertainty about USCIS policy create an immigration risk that, for most investors, is far worse than the risk of losing their investment. The risk is that after many years of waiting, relocating themselves and their families to the U.S. and starting a life here, they may face the loss of their green cards and even possible deportation as a result of changes in business fortune over which they have no control.
The result is that the investor market will likely continue to favor large real estate development projects that rely exclusively, or almost exclusively, on construction jobs. Manufacturing, farming, technology, or other operations intensive projects are likely to remain very difficult to fund with EB-5 money. Since many of these types of projects are more likely to be in rural or distressed areas than large scale construction projects, the immigration risks involved are likely to push EB-5 investments into real estate projects in major urban areas. In fact, with the visa backlog increasing, this immigration risk may be more of a motivating factor than the price difference between investing in a TEA or non-TEA project.
Congress can certainly solve this issue by reducing the backlog or changing the requirements for EB-5 investors to more closely track the Marriage Fraud Amendments and allow an EB-5 investor who meets the I-829 requirements within two years of I-526 approval but who has not yet become a conditional resident, to enter as an unconditional resident. Further, USCIS could alleviate some of the immigration risk by adopting and publishing clear guidance regarding job creation, material change, and maintaining the investment at-risk.
 See Immigration Marriage Fraud Amendments Act of 1986, Pub. Law 99-639, 100 Stat. 3537 (Nov. 10, 1986).
 This of course includes the current USCIS processing time for an I-526 petition (18 months) plus the current I-829 processing time (17 months) plus the time it takes to get an EB-5 visa after I-526 approval (unknown, but the assumption is at least three to four years).
 It is arguable that jobs modeled using revenues should also be deemed to be permanent in the same way that jobs modeled using construction expenditures are, but USCIS policy on this issue is not clear.
 An alien who is married to a U.S. citizen for more than two years at the time of becoming a permanent resident is granted unconditional permanent residence.